Pay for Delay and Drug Design Defect Cases Take Center Stage at Supreme Court

While the NCAA “March Madness” Tournament is always the lead sports story this time of year – did anybody out there watch Florida Gulf Coast College over the weekend?! –March can also provide a madness of sorts for high-profile Supreme Court arguments.  Last March, the Supreme Court set aside an unprecedented number of days for lengthy arguments over the constitutionality of President Obama’s Affordable Care Act.  Although this year the mainstream media will be focusing on the arguments regarding the constitutionality of California’s Proposition 8 and the Defense of Marriage Act (regarding gay marriage), two significant cases with far-reaching consequences for the branded and generic drug industries were also argued this month.  How the Supreme Court rules on so-called “pay for delay” settlements in patent infringement litigations and a First Circuit decision holding that generic drug makers can be held liable for personal injuries on a “design defect” theory, even if federal preemption would bar an identical suit on a “failure to warn” theory, should decide the course for much drug industry litigation for years to come.

Reverse Payment Settlements (a.k.a. “pay-for-delay” deals) 

Yesterday, the Supreme Court heard oral arguments in the widely watched “pay for delay” case from the Eleventh Circuit, Federal Trade Comm’n v. Actavis Inc., et al,  (formerly captioned  Federal Trade Comm’n v. Watson Pharmaceuticals, Inc., et al, prior to Watson’s acquisition of Actavis), with a decision expected by the end of June.  So much has been written and debated about this case, that one blog post can’t do the subject justice.  Nonetheless, in a nutshell, the FTC has been arguing for more than a decade that Hatch-Waxman patent litigation settlements in which the branded-innovator manufacturer (and patent holder) makes payment to a generic manufacturer (and alleged infringer) in exchange for delayed generic market entry are inherently anticompetitive and illegal.  According to the FTC, these reverse payments keep low cost generic versions of branded drugs off the market longer than should be the case, drive up consumer costs and, therefore, should be presumptively illegal.

After losing several battles in the courts of appeal, including Actavis, the FTC’s view finally prevailed last Summer when the Third Circuit, in In re K-Dur Antitrust Litigationconcluded that reverse payment settlements are subject to antitrust challenge and are presumptively illegal.  Prior to K-Dur, the Eleventh Circuit and other courts had ruled that, absent a finding that the branded manufacturer had procured the patent fraudulently or engaged in sham litigation, any settlement that didn’t block generic market entry beyond expiration of the patent’s term was within the “scope of the patent” and reasonable.  The K-Dur court reversed the presumption of patent validity implicit in Actavis and instructed courts in the Third Circuit to apply a “quick look rule of reason analysis” in which a reverse payment will be viewed as “prima facie evidence of an unreasonable restraint of trade.”  Although such a presumption can be rebutted on a showing that the reverse payment “was for a purpose other than delayed entry” or offered “some pro-competitive benefit,” in the absence of proof of the underlying patent’s validity – something that the settlement was designed to avoid – it would be difficult for defendants to overcome the K-Dur presumption.

During oral arguments yesterday, the Supreme Court Justices, while appearing somewhat sympathetic to the FTC’s arguments, appeared divided on devising a new antitrust rule just for Hatch-Waxman settlements.  What the Court will ultimately do is anybody’s guess.  However, if the Court somehow ends up affirming Actavis and adopting some version of the scope of the patent test, it won’t be  because of any pro-patent or pro-pharmaceutical bent, but most likely because of the strong judicial preference of encouraging settlements — the same overriding rationale underlying Actavis and the other courts following the scope of the patent test.  It is also possible for the Court to reverse Actavis, but not adopt the Third Circuit’s rule of reason test with its accompanying view that all reverse payments are presumptively anticompetitive and illegal (and the implicit assumption that a reverse payment = an invalid/unenforceable patent).  Stay tuned for more posts on this subject in the coming months.

The Design Defect End-Around 

Ever since the Supreme Court held in Pliva v Mensing that generic manufacturers were effectively immune from products liaibility lawsuits, plaintiffs’ lawyers, their clients and even politicians have been pulling out their hair over what to do.  In Pliva, the Court found that because FDA regulations require that the labeling on a generic drug be identical to its brand drug counterpart, federal law preempts state court failure to warn claims.  Since the Supreme Court’s decision, the federal courts have rejected all attempts by plaintiffs to distinguish their suits from Pliva or to otherwise circumvent Pliva’s hard and fast preemption ruling — that is, until Bartlett v. Mutual Pharmaceutical Co.  In Bartlett, the plaintiff had taken Mutual’s generic sulindac for shoulder pain and later developed Steven-Johnson syndrome and toxic epidermal necrolysis, leaving her nearly permanently blind and disabled.  Rather than sue Mutual on a typical failure to warn theory, Bartlett’s husband filed suit in New Hampshire on a design defect theory, claiming that the FDA never should have approved the drug and that the medication was unreasonably dangerous and defective.   The First Circuit affirmed the jury’s $21 million verdict and last week the Supreme Court heard Mutual’s arguments that the First Circuit’s ruling distinguishing Bartlett from Pliva was nothing more than an “end-around” circumvention of Pliva’s import: specifically, that a drug’s design, much like its labeling, is within the exclusive purview of the FDA and that the FDA’s regulations (no matter how illogical or unfair it might be to plaintiffs like Mrs. Bartlett) preempt any state-based claim.  Unfortunately for Mr. and Mrs. Bartlett, I’m not at all confident that five or more Justices can be convinced to distinguish her design defect case from the lessons of Pliva.

And the bad news may not be limited to injured plaintiffs.  Although branded manufacturers might have breathed a sigh of relief that for once its interests weren’t at stake in the outcome of Bartlett, a recent Alabama Supreme Court opinion should give the industry something to worry about.  On January 11th, in response to a question certified to it by a federal court presiding over a misrepresentation and failure to warn personal injury suit, the Alabama high court opined in Wyeth v. Weeks that, while prohibited under Pliva from suing the manufacturer of a generic version of  heartburn medication, Reglan, the plaintiff could nevertheless file suit against Wyeth and Pfizer (which acquired Wyeth), since the branded manufacturer controls the adequacy of the labeling for both its product and any generic drug equivalent.  While most courts addressing the same question had previously rejected such an interpretation of Pliva, unless the Alabama Supreme Court reverses course, branded manufacturers might find themselves fending off suits for years to come in Alabama state courts no matter what happens in Bartlett.


About José P Sierra

José Sierra is a partner at Laredo & Smith, LLP, in Boston, which provides respected advice and creative representation in business litigation, white collar criminal defense, government investigations, corporate compliance, and business and employment law. Prior to joining the Firm, Mr. Sierra was a principal at Fish & Richardson. Previously, Mr. Sierra was senior vice president, chief compliance and ethics officer for Sepracor Inc., and Kos Pharmaceuticals, and was legal director at Schering-Plough Corporation, and an assistant U.S. attorney in the Newark, NJ U.S. Attorney's Office.

Mr. Sierra's practice focuses on white collar criminal defense, government investigations and corporate compliance. Contact him at 617-443-1100 or via .

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